Busting the Myths Around Blockchains

Sep 9, 2016 | Alyssa Jarrett

We’re here to take a wrecking ball to a few prevailing myths about blockchains. Image: Shutterstock

Much has changed with blockchain technology since the pseudonymous Satoshi Nakamoto created the first Bitcoin software in 2009, and even since Ripple was founded four years later. What financial institutions once considered as the wild west for crypto-enthusiasts has now taken the world stage as blockchains are heralded as the industry’s most significant innovation.

This evolution has led to misconceptions about what blockchains are and where they are headed in the future.

To clarify the conversation around blockchains, we’d like to dispel a few myths.

Myth: Blockchain technology is all hype.

Reality: Blockchains are being adopted to solve real problems.

Considering that Gartner recently reported that blockchain is nearing its peak of inflated expectations, it’s easy for skeptics to believe that the financial technology trend is all hype and no substance.

However, growing market adoption demonstrates a true customer need: institutions are expected to invest $400 million in blockchain technology by 2019. Although blockchains come in many forms, they offer the following key benefits to financial settlement:

Distributed validation with a cryptographic guarantee of settlement.

Increased settlement speed and reduced settlement risk.

The immutability and auditability of transactions.

As enthusiasm for the blockchain revolution reaches its climax, banks are already working toward exploring the opportunities that blockchains hold for their businesses.

The danger in this fervor, however, exists when interoperability is not at the forefront of industry innovation. Many blockchains are permission-based, creating further network fragmentation. If modern infrastructure does not support the interconnectivity of all ledgers, then the full potential of blockchain technology will never be reached.

Myth: Blockchains are well-suited for bank-to-bank settlement.

Reality: Blockchains aren’t designed for the diversity of institutional use cases on a global scale.

Blockchains are well-suited to improve liquidity management by leveraging their native digital assets but are simply not designed to support the diversity of institutional use cases and the scale that global settlements require for these reasons:

No transaction privacy: Blockchains record all transactions on a global public ledger, which could put banks in a compromising position if identified.

Lack of scalability: As a single database, public ledgers cannot scale to process trillions of transactions.

Settlement lag: Settlement using the Bitcoin blockchain takes up to sixty minutes, creating exposure and risk.

While many banks understand the value of using digital assets to reduce liquidity costs, most prefer that this blockchain feature remains an option rather than a requirement. The inflexibility of blockchains limits their institutional applicability, preventing the technology from serving a broader range of financial use cases.

Myth: One blockchain will eventually reign supreme, so banks should wait and see which blockchain technology to adopt.

Reality: The world’s transactional needs cannot be served by one blockchain.

Different types of ledgers exist to serve different customers and specific needs, so it’s misguided to believe that one blockchain, which is a ledger, will effectively support all the various audiences and use cases for financial institutions.

Moreover, with cross-border payments alone increasing at a rate almost three times faster than the global GDP, putting the world’s transactions on one blockchain seems as reasonable as putting the entire Internet on one database.

To support the world’s diverse and growing transaction needs, the ideal design for a global settlement network is much like how the Internet is designed — networks of databases communicating.

By using an IP infrastructure, ledgers or networks can then specialize in features and functionality to best serve bank customers. This IP-based design is simpler and more scalable than creating a new ledger system, like a blockchain, wherein all existing ledgers must be copied to it.

All ledgers should be connected with a simple, common protocol so that money can move around the world just as frictionlessly as information does online today. Enabling this Internet of Value is precisely why Ripple advocates for the Interledger Protocol (ILP).

The Case for ILP

The Interledger Protocol is an emerging global technical standard that provides the same benefits as other blockchain systems, including the certainty and auditability of transactions, but adds enterprise-grade features, such as unbounded scalability, complete transaction privacy and the optional use of digital assets.

ILP can work with any blockchain or payment network, regardless of its underlying technology. Much like HTTP is the foundation of data communication for the World Wide Web, Interledger can act as the foundation of the Internet of Value, making sending money just as easy as sending emails.

In essence, we believe that ILP is the key for a global settlement network.